October 2015 Closed-End Fund Market Update

Portfolio Specialist Allen Webb talks to Portfolio Manager Steve O'Neill about the closed-end fund market for the month of October 2015.

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[BEGIN TRANSCRIPT]

ALLEN: Steve, in the last couple months when we got together, that being August and September, the story was kind of risk off and negative capital market returns and that filtered into negative closed-end fund returns, as well as widening discounts. When I look at October's capital market performance, it looks like risk on. S&P is up eight and a half. High yield up about 300 basis points. Did that filter into the closed-end fund market?

STEVE: Definitely. Closed-end funds are up about 5 percent for the month. That's all closed-end funds. On the taxable bond side, those funds were up about 4 percent for the month, and equity funds were pretty close to the S&P 500. They were up 800 basis points. In looking at discounts, you know, a good part of those returns came from discount narrowing, and so, all closed-end funds I said were up about 5, and about 200 basis points that was discount narrowing. The taxable bond funds also had about 200 basis points of discount narrowing for the month. So that takes us to about 8 percent all in on the discounts, which is, you know, a lot narrower than it had been around that 10 percent level for the last few months.

ALLEN: Stripping out equity performance for a second, when I look at the sort of broad equity market via the S&P, I notice we're now just back in positive territory for the year. But even despite positive performance in October from equity closed-end funds, it still looks like a pretty negative performance year-to-date. How do you think about the lagging of equity closed-end funds?

STEVE: To say lagging is certainly an understatement. The equity closed-end fund group is down about 12 percent year-to-date even with October's rally of 8 percent, and the reason for that is that closed-end funds are not benched against the S&P 500. There's very few funds that actually use the S&P 500 as their benchmark, and the reason for that is that closed-end fund investors want yield, and the S&P 500 is not going to deliver a juicy enough yield to temp the closed-end fund investor. And so, when you look at the space, you know, just looking at the top ten equity closed-end funds, about a third of them are MLP closed-end funds. You've got a large utility fund in that group, and then also a number of covered call funds, which are selling away part of the upside in return for the income. And so, when you look at the space, you know, there's a lot of diversification outside of the S&P 500, and so, when the S&P 500 does well, it's certainly reasonable to expect closed-end funds to do well because there's certainly a high correlation, but the beta of the equity closed-end fund group is much below one. If you look at the funds or the names that have worked really well in the S&P 500 this year, you've got Netflix, Amazon, Facebook, Google.... there's very low ownership of those, you know, no-dividend names in the closed-end fund group. So, it is frustrating from, you know, an investor standpoint, to look at the closed-end fund space and see that large lag. But over time, we believe that the diversification is good, and as a manager in the closed-end fund space, we certainly have the opportunity to allocate to S&P 500-type closed-end funds, but also to gain some of that diversification as well.

ALLEN: My take away from that as an investor is to just be careful about looking at S&P returns and translating that into equity closed-end fund returns. You're not exactly getting the same beta exposure from the majority of equity closed-end fund universe.

STEVE: That's true. There's only about two dozen equity closed-end funds that are specifically targeting the S&P 500.

ALLEN: Steve, last question. So, here we are in early November. We've talked... we're on record in the last couple of years talking about tax loss selling in the closed-end fund world, which I'm assuming is kind of about where we are right now in the calendar. What are your thoughts about how tax loss selling season might be going at this point?

STEVE: I mean, it's certainly an exciting topic in the closed-end fund space. Discounts generally widen in the fourth quarter if there are year-to-date losses, and the reason for that is that investors harvest the loss and redeploy the capital into a similar investment strategy while harvesting that loss from a tax perspective. What I think is going to happen this year is that we have already seen the low on discounts. Our viewers have certainly appreciated the volatility in the last two months. Discounts actually bottomed on August 24 when the Dow dropped 1,000 points. And so, when you have that kind of discount volatility, it's unlikely we'd see the typical pattern of discounts bottoming probably mid-month or early November. But, again, I think that where we are today, discounts are certainly attractive enough that I wouldn't be too cute about timing an investment in closed-end funds. And on the flip side, if you have losses year-to-date in any of your mutual funds, or ETFs or even on that closed-end fund, it makes a lot of sense to harvest that tax loss and redeploy into what I think is a very cheap closed-end fund opportunity.

ALLEN: Steve, thanks as always for your comments.

STEVE: Thank you.

[END TRANSCRIPT]

Video recorded 11.9.2015.

Produced by RiverNorth Capital Management, LLC ("RiverNorth" "we" or "us").

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Opinions referenced are as of the day recorded and are subject to change due to changes in the market, economic conditions, or changes in the legal and/or regulatory environment and may not necessarily come to pass.

Past performance is not a guarantee of future results. Diversification does not ensure a profit or guarantee against loss.

Investing involves risk. Principal loss is possible.

Definitions

The High Yield CEF index total return and discount statistics are based upon the Morningstar Un-weighted High Yield CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a high yield investment strategy. High yield closed-end funds are defined as funds that seek high current income through investing in non-investment grade debt instruments.

The Preferred CEF index total return and discount statistics are based upon the Morningstar Un-weighted Preferred CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a preferred investment strategy. Preferred closed-end funds are defined as funds that invest primarily in preferred and/or convertible preferred stocks.

The Municipal Bond CEF index total return and discount statistics are based upon the Morningstar Un-weighted Municipal Bond CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a municipal bond investment strategy. Municipal bond closed-end funds are defined as funds that invest in a diversified portfolio of investment-grade municipal bonds in a variety of sectors and States.

The Global Income CEF index total return and discount statistics are based upon the Morningstar Un-weighted Global Income CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a global income investment strategy. Global income closed-end funds are defined as funds that invest primarily in a mixture of U.S. and foreign government and corporate debt, with an emphasis on developed countries.

The Investment Grade CEF index total return and discount statistics are based upon the Morningstar Un-weighted Investment Grade CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a investment grade investment strategy. Investment grade closed-end funds are defined as funds that invest primarily in investment grade debt instruments.

The Emerging Income CEF index total return and discount statistics are based upon the Morningstar Un-weighted Emerging Income CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing an emerging income investment strategy. Emerging income closed-end funds are defined as funds that invest primarily in emerging market government and corporate debt securities.

The Multi-Sector Bond CEF index total return and discount statistics are based upon the Morningstar Un-weighted Multi-Sector Bond CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a multi-sector bond investment strategy. Multi-sector bond closed-end funds are defined as funds that invest across several fixed income asset classes, with typically less than 50% in any one of these asset classes.

The Bank Loan CEF index total return and discount statistics are based upon the Morningstar Un-weighted Bank Loan CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a bank loan investment strategy. Bank loan closed-end funds are defined as funds that invest primarily in collateralized senior bank loans issued by corporations. Most of these securities are typically rated below investment grade.

The Convertible CEF index total return and discount statistics are based upon the Morningstar Un-weighted Convertible CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a convertible investment strategy. Convertible closed-end funds are defined as funds that invest primarily in Convertibles bonds / Convertible preferred stock.

The Mortgage Bond CEF index total return and discount statistics are based upon the Morningstar Un-weighted Mortgage Bond CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a mortgage bond investment strategy. Mortgage bond closed-end funds are defined as funds that invest primarily in a variety of mortgage-backed securities and mortgage derivatives.

The Government and Agency CEF index total return and discount statistics are based upon the Morningstar Un-weighted Government and Agency CEF Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a government and agency investment strategy. Government and Agency closed-end funds are defined as funds that invest primarily in U.S. Treasuries and Agency debt.

The Covered Call index total return and discount statistics are based upon the Morningstar Un-weighted Covered Call Index, which is the average of all closed-end funds categorized by Morningstar as utilizing a covered call investment strategy. Covered call closed-end funds are defined as funds investing in equities and generate additional income by writing calls on at least 50% of their portfolio.

The Emerging Market Equity index total return and discount statistics are based upon the Morningstar Un-weighted Emerging Market Equity Index, which is the average of all closed-end funds categorized by Morningstar as utilizing an emerging market equity investment strategy. Emerging Market Equity closed-end funds are defined as funds that invest primarily in emerging market government and corporate debt securities.

The Global Equity index total return and discount statistics are based upon the Morningstar Un-weighted Global Equity index, which is the average of all closed-end funds categorized by Morningstar as utilizing a global equity investment strategy. Global equity closed-end funds are defined as funds that invest primarily in equity securities in U.S. and foreign countries, with an emphasis on developed countries. Most of these funds seek long-term capital appreciation rather than high income.

The Hybrid index total return and discount statistics are based upon the Morningstar Un-weighted Hybrid index, which is the average of all closed-end funds categorized by Morningstar as utilizing a hybrid investment strategy. Hybrid closed-end funds are funds investing in both equity and fixed-income securities in U.S. and foreign countries, with an emphasis on developed countries. Funds are categorized into this peer group if they have a policy of investing no more than 70% of their assets in either equities or fixed income.

The Domestic Equity index total return and discount statistics are based upon the Morningstar Un-weighted Domestic Equity index, which is the average of all closed-end funds categorized by Morningstar as utilizing a domestic equity investment strategy. Domestic equity closed-end funds are defined as funds investing their assets primarily in U.S. equity securities; generally, these funds are seeking long-term capital appreciation rather than income.

The price at which a closed-end fund trades often varies from its NAV. Some funds have market prices below their net asset values - referred to as a discount. Conversely, some funds have market prices above their net asset values - referred to as a premium.

S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy based on the changing aggregate market value of these 500 stocks. The Barclays Capital U.S. Aggregate Bond Index is an unmanaged index of investment-grade fixed-rate debt issues with maturities of at least one year. This unmanaged index does not reflect fees and expenses. The S&P 500 and Barclays Capital U.S. Aggregate Bond Indices are indices only and cannot be invested in directly.

High yield bond spreads are the percentage difference in current yields of various classes of high-yield bonds (often junk bonds) compared against investment-grade corporate bonds, Treasury bonds or another benchmark bond measure. Spreads are often expressed as a difference in percentage points or basis points (1/100th of 1%, or 0.01%).

MLP - A master limited partnership (MLP) is a publicly traded limited partnership. Shares of ownership are referred to as units. MLPs generally operate in the natural resource, financial services, and real estate industries.

Beta reflects the sensitivity of a fund's return to fluctuations in the market index. A beta of 0.5 reflects half of the market's volatility as represented by the Fund's primary benchmark, while a beta of 2.0 reflects twice the volatility.

Yield is the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

RiverNorth did not have a position in Netflix, Amazon, Facebook and Google as of the production date of this video.

Source: Morningstar, Inc.